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Sunday, December 7, 2008

S'pore May Face 'Worst Quarter' In Early 2009

Source : The Straits Times, Dec 6, 2008

First quarter economic output expected to shrink by 7% to 8%

SINGAPORE could face its worst quarter of economic contraction early next year in year-on-year terms, an economist has warned.

Dr Chua Hak Bin, head of equity research at financial giant Citigroup, said yesterday that next year's first-quarter economic output could shrink by 7 per cent to 8 per cent compared with the first quarter this year.

He was speaking at the Singapore Press Club's seminar on the financial crisis held at Singapore Press Holdings' News Centre in Toa Payoh North.

'The worst quarter of contraction we have faced has been minus 6.5 per cent during the tech bust. But we are likely to see minus 7 to 8 per cent in the first quarter next year. This would be the single worst contraction ever,' he said.

He also predicted that Singapore could suffer five straight quarters of contraction, again in year-on-year terms. The Republic has never had more than four consecutive negative quarters and suffered three during the Asian financial crisis.

The economy here shrank by 0.6 per cent in the third quarter. Dr Chua said five quarters - that is another four quarters including the current quarter - is his worst-case scenario and would be caused by further weakness in the regional economies such as Malaysia and Indonesia as the crisis moves closer to home.

'It's not too hard to imagine our neighbourhood also falling into a recession, which also questions whether Singapore can hold up,' he said.

For those countries, oil constitutes the bulk of their trade, but with plunging oil prices - it has now fallen below US$44 a barrel - as well as commodity prices in general, the risks to those economies have escalated, Dr Chua said.

Global demand for exports such as Singapore's has taken a beating, and the Republic's exchange rate has not weakened dramatically. Therefore, it is hard to see Singapore exporting its way out of recession, he said.

But he said the Singapore dollar is likely to see further weakening to $1.60 to $1.65 against the US dollar in the next six months. It is now trading at $1.52.

However, there is some light at the end of the tunnel. Debt levels among Singaporeans are not high, he said, and the Republic, as a net importer, will find some relief from lower oil prices.

The country is also in a better position to use fiscal policy to help the economy. He said some $3 billion to $4 billion could be used in the upcoming Budget to support a substantial cut in both corporate and personal income tax rates.

The Government may also restart $4.7 billion worth of deferred construction projects that will create jobs and stimulate the economy, he added.

Mr Manu Bhaskaran, head of economic research at the Centennial Group, who also spoke at the seminar, echoed similar sentiments when he predicted that the global economy would get a lot worse before things got better.

He said that there would be a lot more corporate bankruptcies with iconic names going down and also more bad news coming out of China as it faced problems of its own financial system as well as weakness in underlying demand.

'There will be a much worse downturn than what many have forecast. The next six months are going to be particularly painful. By the end of next year, we could see many economies with bad deflation,' he said.

He predicted a recovery in late 2010 and said Asia will do better post-crisis than the rest of the world.

WORST IS YET TO COME

'The worst quarter of contraction we have faced has been minus 6.5 per cent during the tech bust. But we are likely to see minus 7 to 8 per cent in the first quarter next year. This would be the single worst contraction ever.'